商业银行学答案第八版罗斯Chap005.docx
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商业银行学答案第八版罗斯Chap005.docx
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商业银行学答案第八版罗斯Chap005
CHAPTER5
THEFINANCIALSTATEMENTSOFBANKSANDTHEIRPRINCIPALCOMPETITORS
GoalofThisChapter:
Thepurposeofthischapteristoacquaintthereaderwiththecontent,structureandpurposeofbankfinancialstatementsandtohelpmanagersunderstandhowinformationfrombankfinancialstatementscanbeusedastoolstorevealhowwelltheirbanksareperforming.
KeyTopicsinthisChapter
∙AnOverviewoftheBalanceSheetsandIncomeStatementsofBanksandOtherFinancialFirms
∙TheBalanceSheetorReportofCondition
∙AssetItems
∙LiabilityItems
∙RecentExpansionofOff-BalanceSheetItems
∙TheProblemofBook-ValueAccountingand〞WindowDressing〞
∙ComponentsoftheIncomeStatement:
RevenuesandExpenses
∙Appendix:
SourcesofInformationontheFinancial-ServicesIndustry
ChapterOutline
I.Introduction:
TheStatementsReviewedinThisChapter
IIAnOverviewofBalanceSheetsandIncomeStatements
IIITheBalanceSheet(ReportofCondition)
A.ThePrincipalTypesofAccounts
B.AssetsoftheBankingFirm
1.CashandDuefromDepositoryInstitutions
2.InvestmentSecurities:
TheLiquidPortion
3.InvestmentSecurities:
TheIncome-GeneratingPortion
4.TradingAccountAssets
5.FederalFundsSoldandReverseRepurchaseAgreements
6.LoansandLeases
7.LoanLosses
8.SpecificandGeneralReserves
9.InternationalLoanReserves
10.UnearnedIncome
11.Nonperforming(noncurrent)Loans
12.BankPremisesandFixedAssets
13.OtherRealEstateOwned(OREO)
14.GoodwillandOtherIntangibleAssets
15.AllOtherAssets
C.LiabilitiesoftheBankingFirm
1.Deposits
2.BorrowingsfromNondepositSources
3.EquityCapitalfortheBankingFirm
a.PreferredStock
b.CommonEquity
D.ComparativeBalanceSheetRatiosforDifferentSizeBanks
E.RecentExpansionofOff-Balance-SheetItemsinBanking
F.TheProblemofBook-ValueAccounting
G.Auditing:
AssuringReliabilityofFinancialStatements
IV.ComponentsoftheIncomeStatement(ReportofIncome)
A.FinancialFlowsandStocks
1.InterestIncome
2.InterestExpenses
3.NetInterestIncome
4.LoanLossExpense
5.NoninterestIncome
6.NoninterestExpenses
7.NetOperatingIncomeandNetIncome
B.ComparativeIncomeStatementRatiosforDifferent-SizeFinancialFirms
V.TheFinancialStatementsofLeadingNonbankFinancialFirms:
AComparisontoBankStatements
VI.AnOverviewofKeyfeaturesofFinancialStatementsandTheirConsequences
VII.SummaryoftheChapter
ConceptChecks
5-1.Whataretheprincipalaccountsthatappearonabank'sbalancesheet(ReportofCondition)
Theprincipalassetitemsonabank'sReportofConditionareloans,investmentsinmarketablesecurities,cash,andmiscellaneousassets.Theprincipalliabilityitemsaredepositsandnondepositborrowingsinthemoneymarket.Equitycapitalsuppliedbythestockholdersroundsoutthetotalsourcesoffundsforabank.
5-2.Whichaccountsaremostimportantandwhichareleastimportantontheassetsideofabank'sbalancesheet
Theprincipalbankassetitemsfrommostimportanttoleastimportantare:
:
RankOrderAssets
1Cash
2InvestmentSecurities
3Loans
4MiscellaneousAssets
5-3.Whataccountsaremostimportantontheliabilitysideofabalancesheet
Theprincipalbankliabilityitemsfrommostimportanttoleastimportantare:
RankOrderLiabilitiesandEquityCapital
1Deposits
2NondepositBorrowings
3EquityCapital
4MiscellaneousLiabilities
5-4.Whataretheessentialdifferencesamongdemanddeposits,savingsdeposits,andtimedeposits
Demanddepositsareregularcheckingaccountsagainstwhichacustomercanwritechecksormakeanynumberofpersonalwithdrawals.RegularcheckingaccountsdonotbearinterestundercurrentU.S.lawandregulation.
Savingsdepositsbearinterest(normally,theycarrythelowestratepaidonbankdeposits)butmaybewithdrawnatwill(thoughabankusuallywillreservetherighttorequireadvancenoticeofaplannedwithdrawal).
Timedepositscarryafixedmaturityandthebankmayimposeapenaltyifthecustomerwithdrawsfundsbeforethematuritydateisreached.Theinterestratepostedontimedepositsisnegotiatedbetweenthebankanditsdepositcustomerandmaybeeitherfixedorfloating.
ANOWaccountcombinesfeaturesofasavingsaccountandacheckingaccount,whileamoneymarketdepositaccountencompassestransactionalpowerssimilartoaregularcheckingaccount(thoughusuallywithlimitationsonthenumberofchecksordraftsthatmaybewrittenagainsttheaccount)butalsoresemblesatimedepositwithaninterestratefixedforabriefperiod(suchasweekly)butthenbecomeschangeableoverlongerperiodstoreflectcurrentmarketconditions.
5-5.Whatareprimaryreserves,andsecondaryreservesandwhataretheysupposedtodo
Primaryreservesconsistofcash,includingabank'svaultcashandcheckabledepositsheldwithotherbanksoranyotherfundssuchasreserveswiththeFederalReservethatareaccessibleimmediatelytomeetdemandsforliquiditymadeagainstthebank.
Secondaryreservesconsistofassetsthatpaysomeinterest(thoughusuallypayreturnsthataremuchlowerthanearnedonotherassets,suchasloans)buttheirprincipalfeatureisreadymarketability.MostSecondaryreservesaremarketablesecuritiessuchasshorttermgovernmentsecuritiesandprivatesecuritiessuchascommercialpaper.
Bothprimaryandsecondaryreservesareheldtokeepthebankinreadinesstomeetdemandsforcash(liquidity)fromwhateversourcethosedemandsmayarise.
5-6.Supposethatabankholdscashinitsvaultof$1.4million,short-termgovernmentsecuritiesof$12.4million,privatelyissuedmoneymarketinstrumentsof$5.2million,depositsattheFederalReservebanksof$20.1million,cashitemsintheprocessofcollectionof$0.6million,anddepositsplacedwithotherbanksof$16.4million.HowmuchinprimaryreservesdoesthisbankholdInsecondaryreserves
Thebankholdsprimaryreservesof:
VaultCash+DepositsattheFed+CashItemsinCollection+DepositsWithOtherBanks
=$1.4mill.+$20.1mill.+$0.6mill.+$16.4mill.
=$38.5million
Thebankhassecondaryreservesof:
Short-termGovernmentSecurities+PrivateMoney-MarketInstruments
=$12.4mill.+$5.2mill.
=$17.6million
5-7.Whatareoff-balance-sheetitemsandwhyaretheyimportanttosomefinancialfirms
Off-balance-sheetitemsareusuallytransactionsthatgeneratefeeincomeforabank(suchasstandbycreditguarantees)orhelphedgeagainstrisk(suchasfinancialfuturescontracts).Theyareimportantasasupplementtoincomefromloansandtohelpabankreduceitsexposuretointerest-rateandothertypesofrisk.
5-8.WhyarebankaccountingpracticesunderattackrightnowInwhatwayscouldfinancialinstitutionsimprovetheiraccountingmethods
Thetraditionalpracticeofbankshasbeentorecordthevalueofassetsandliabilitiesattheirvalueonthedaytheaccountswereoriginallycreatedandnotchangethosevaluesoverthelifeoftheaccount.TheSECandFASBstartedquestioningthispracticeinthe1980’sbecausetheywereconcernedthatinvestorsinbanksecuritieswouldbemisledaboutthetruevalueofthebank.Usingthishistoricalvalueaccountingmethodmayinfactconcealabankthatinsolventinacurrentmarketvaluesense.
Thebiggestcontroversycenteredonthebanks’investmentportfoliowhichwouldappeartobeeasytovalueatitscurrentmarketprice.Ataminimum,bankscouldhelpthemselvesbymarkingtheirinvestmentportfoliotomarket.Thiswouldgiveinvestorsanindicationofthetruevalueofthebank’sinvestmentportfolio.Bankscouldalsoconsiderusingthelowerofhistoricalormarketvalueforotheraccountsonthebalancesheet.
5-9.WhataccountsmakeuptheReportofIncome(incomestatementofabank)
TheReportofIncomeincludesallsourcesofbankrevenue(loanincome,investmentsecurityincome,revenuefromdepositservicefees,trustfees,andmiscellaneousserviceincome)andallbankexpenses(includinginterestonallborrowedfunds,salaries,wages,andemployeebenefits,overheadcosts,loanlossexpense,taxes,andmiscellaneousoperatingcosts.)Thedifferencebetweenoperatingrevenuesandexpenses(includingtaxobligations)isreferredtoasnetincome.
5-10.Inrankorder,whatarethemostimportantrevenueandexpenseitemsonaReportofIncome
Bydollarvolumeinmostrecentyearstherankorderoftherevenueandexpenseitemsonabank'sReportofIncomeis:
RankOrderRevenueItemsExpenseItems
1LoanIncomeDepositInterest
2SecurityIncomeInterestonNondepositBorrowings
3ServiceChargesonDepositsSalaries,Wages,and
andOtherDepositFeesEmployeeBenefits
4OtherOperatingRevenuesMiscellaneousExpenses
5-11.Whatistherelationshipbetweentheprovisionforloanlossesonabank'sReportofIncomeandtheallowanceforloanlossesonitsReportofCondition
Grossloansequalthetotalofallloanscurrentlyoutstandingthatarerecordedonthebank'sbooks.Netloansareequaltogrossloanslessanyinterestincomeonloansalreadycollectedbythebankbutnotyetearnedandalsolesstheallowanceforloan-lossaccount(orbad-debtreserve).
Theallowanceforloanlossesisbuiltupgraduallyovertimebyanannualnoncashexpenseitemthatischargedagainstthebank'scurrentincome,knownastheProvisionforLoanLosses.Thedollaramountoftheannualloan-lossprovisionplustheamountofrecoveredfundsfromanyloanspreviouslydeclaredworthless(chargedoff)lessanyloanschargedoffasworthlessinthecurrentperiodisaddedtotheallowance-for-loan-lossesaccount.
Ifcurrentcharge-offsofworthlessloansexceedtheannuall
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